Business Know-How

This post is generalized from an agblog, Farm CPA Today, by Paul Neiffer. Paul is a CPA with an ag background and serving the agricultural community in central Washington.

While his post is titled "Are You Ready for the Super Bowl of Farming?" the suggestions he makes to farmers to be sure their businesses are play-off ready could apply to many types of businesses.

So consider this checklist of 'best practices' for any business and see how your business clients measure up. I have put in {brackets} the places to substitute the appropriate wording or practices for the type of business you lend to.

As a manager of your {farm operation} are you:

  • Using accrual accounting to determine your true {net farm} income for each year
  • Taking advantage of {precision farming} to minimize your input costs and maximize your revenues
  • Using a marketing plan each year for each {crop}
  • Maximizing your equipment utilization to reduce your overall equipment cost {per acre}
  • Providing appropriate incentives for your employees
  • Taking advantage of a Web Site to provide information to your landlords, employees and other interested parties
  • Being proactive with you banker by providing information before they ask and keeping them updated
  • Obtaining education each year on how to improve each of the above items.

If you are an ag lender, take a look at Paul's blog. Understanding the business and tax side of agriculture will improve your lending knowledge-base.

What blogs or online resources do you use to keep abreast of business and business lending issues?
I just published the latest eCourse at I know that some small business owners sign up for the Lender's courses to see what the lender wants. This would be a good one!

Here is my short list:

  • Cover page...sizzle optional
  • General info including details on source and use of funds
  • Company info including history and management
  • Marketing info including brochures, website screen shots, info on market share and competitors
  • Financial info including projections and recent financials
The eCourse on Loan Proposals can be purchased a la carte or as part of the subscription to the entire eCourse List of over 30 courses. Check out the entire list of online credit courses for lenders.

Clues the lender doesn't want to miss

  • The extent of the business owners marketing and financial knowledge about their business can either give the lender confidence or give her the willies!
  • Typos and grammatical errors in the loan proposal may be an inside window into the sloppy way the company does business with their customers


Here are a few surprises a lender might like to see:

  • Updated loan proposal even if the business lender did not ask
  • Information previously provided has been updated for newer information
  • If financial projections are included, what is the thinking behind it?
  • Independent information that backs the proposal up, such as from the local Economic Development Council
  • An honest and forthright description of recent challenges in the business, actions taken, results and adjustments.

Give 'em a break

If the loan proposal seems overly thick, give the business owner a break. Some lenders take the 'thud factor' (the sheer weight of the proposal) into account so more pages seems the norm these days. Besides, business borrowers may be nervous with what they've heard about the scarcity of business loans. They may think more is better!
Every year I teach Junior Achievement classes in elementary schools. It does not matter how busy I am with 'teaching' business owners and lending professionals. I take time out because it is the right thing to do and I hope you will, too.

It is encouraging!

These kids get it. Sometime between the common sense of a ten year old and the adult years, something gets lost.

Example: The JA book defined a Resource as something people need. One of the students, Max, suggested it should define a Resource as something people need or want. I had to agree!

Planning a business...

The students were given about five minutes to come up with a business they might start:
  • Business name
  • Type of business
  • Good or service
  • Natural resources they might need
  • Human resources they might need
  • Capital resources they might need
They struggled with this assignment, particularly in the short time frame. When time was up I asked if it was hard. Their discouraged faces told the story. Yes, it was hard.

I told them it should be. That starting a business is hard. That there are a lot of questions to ask before they start. But that every business started just the way they started a few minutes ago, with an idea and a start on the questions.

Time for business owners to (re)ask questions...

Perhaps business owners (and maybe their lenders) should ask questions again. The disruption of the recession calls for it.
  • What business are they in?
  • What has changed for their customers and what has remained the same?
  • What resources do they need?
  • Who can help them answer the questions?
Some business owners never asked the questions in the first place. And most of us need to ask them again.

What questions would you add to the list?

Under a headline 'Small Business Lending Strong in 2010' I found this lead sentence:

Lending to U.S. small businesses in 2010 saw it biggest year-over-year gain since December 2006, according to the Thomson Reuters/PayNet Small Business Lending Index.

Sounds good, yes?

So let me point out, a huge year-over-year gain up from a terrible year does not equate to small business lending being 'strong' in my view.

"The economic atmosphere for small businesses did not improve much in 2010," said Denny Dennis, NFIB Research Foundation senior fellow, in a press release. "We don't expect credit levels to reach the levels they did a decade ago."

Some banks and credit unions are targeting small business lending and seeing an increase in their loan portfolio. But any blanket statement that small business lending is strong is misleading, don't you think?

Why does it matter?

It matters because business owners and lenders are attempting to predict future performance in an uncertain environment. When business owners hear that small business lending is strong
  • they may be surprised by a turn-down
  • they may not request the loan far enough out to allow time to seek it from several sources
  • they don't know how to take it when they get turned down for a loan.

Fuzzy thinking

Lenders, if your borrower comes in and says their company experienced the best year-over-year growth in five years, be sure to look at how bad the previous year was before you let yourself be impressed!
If you are trying to decide who to target for small business lending, here is your top-twenty list based on data from Sageworks, a Raleigh, N.C.-based accounting consultancy and private-company data provider.

By average pretax margin, 2003 - 2010

1. Offices of Certified Public Accountants 16.5%

2. Offices of Chiropractors: 15.3%

3. Freestanding Ambulatory Surgical and Emergency Centers: 15%

4. Other Accounting Services: 14.9%

5. Offices of Dentists: 14.7%

6. Tax Preparation Services: 14.7%

7. Offices of Orthodontists: 14.4%

8. Offices of Lawyers: 13.4%

9. Sales Financing: 13.3%

10. Portfolio Management: 12.2%

11. Drilling Oil And Gas Wells: 12%

12. Offices of Optometrists: 11.5%

13. Lessors of Nonresidential Buildings (except Mini-warehouses): 11.3%

14. Offices of Real Estate Appraisers: 11%

15. Lessors of Miniwarehouses and Self-Storage Units: 11%

16. Insurance Agencies and Brokerages: 11%

17. Other Activities Related To Credit Intermediation: 10.7%

18. Investment Advice: 10.7%

19. Offices of Physical, Occupational and Speech Therapists, and Audiologists: 10.6%

20. Offices of Physicians (except Mental Health Specialists): 10.4%

For more details, read the article.
Responsibilities are becoming more clear...that's good!

NCUA has come out with their report directing Directors of Credit Unions to up their skills, if need be, in understanding financial statements and taking the appropriate role in the oversight of the credit unions financial performance and risk.

If you are a CU Director or CEO I recommend you read the letter here:

It is more than just financials, however.

The duties and responsibilities require:

  1. Provide general direction and control
  2. Good faith and reasonable care
  3. Fair and impartially
  4. A  working familiarity with basic finance and accounting practices
  5. Conformity with regulations and good business practices
  6. Reliance on others when prudent

When it comes to financial knowledge, a new board member who does not already have a good grasp of the financial concepts to carry out his/her duties has six months to develop them through training, courses, mentoring, etc.

Most existing board members have until July 27th, 2011 to acquire the necessary knowledge and skills.

IDEA: Create a resume and track your continuing education

At the Kentucky CU League annual meeting in my session on What did you get yourself into? Responsibilities of Board Members in the 'New Normal' attendees recommended you create a resume for yourself if you are a CU Director. I would add to track your education in this area. In addition to listing the annual meeting or directors conference, list the sessions you attended that improve your capabilities in the area of board responsibilities and particularly financial skills.

Bank Directors

I am guessing that bank directors across the country are scrambling to improve their skills in this area as well. Any bank directors or CEOs want to weigh in?

This blog-post is for business lenders and for business owners. While the lender and the owner may take different action related to risk, the list remains the same.

This TOP TEN list comes from a CFO Magazine analysis of SEC comment letters on U.S. Companies in 2009 and the first half of 2010. In many cases, this 'risk' list for publicly-traded companies mirrors the challenges of small- to mid-size companies as well.

The List

  1. Inadequate disclosure issues
  2. Market for products and services
  3. Reliance on suppliers, customers, governments
  4. Going concern
  5. Effects of regulatory changes
  6. Legal exposures and reliance on legal positions
  7. Ineffective internal or disclosure controls
  8. Reliance on certain employees
  9. Conflicts of interest/related party issues
  10. History of operating losses

Order of importance?

I am guessing not since the recent history of operating losses might be the first concern of a business lender. And if a business owner needs to borrow money, this may also be the first concern.

Pick your top three

Business Owners:
This may be one way to identify potential, immediate setbacks and challenges to go to work on. Pick the top three concerns and develop a plan to improve them.

Unless your company is large enough to have management in charge of different departments, there are only so many things you can focus on at once. Prioritize so you can focus.

Business Lenders:
Consider your current borrowers as well as your top prospects. Pick the top three risks that might apply to that borrower so that when you have the conversations, review the financials, 'google' the key players and check out their website you are actively seeking information to decide whether the risk is well handled.

Then include that in your write-up so that you (next time you look at that file), loan committee and the regulators know that you considered and addressed the risks.
According to CFO magazine citing a survey by Greenwich Associates, 'an historically high number of small and midsize companies have put their banking business out for bid.'

19% of midsize companies and 16% of small businesses indicated plans to do so in 2011. Greenwich asserts than in a typical year, only about 10% of companies switch banks.


Why are they switching?

The top driver for small business was the current level of customer service. Also cited were a desire to reduce banking fees and access to new sources of capital. And related to the economic challenges and the credit crisis, in some cases the companies' needs are just not aligned with the capabilities of their banks.

What is a banker to do?

  • Don't assume your banking clients who have stuck with you thus far plan to do so. You may be the last to know.
  • Prioritize your current clients, get in touch with the keepers and stay in touch
  • Prioritize your prospects, get in touch with those you want and stay in touch

What are you doing?

What are you and your business development and business lending colleagues doing to connect or reconnect with business borrowers?

  • Calls or visits?
  • Resources such as business seminars to help them be successful?
  • Referrals to their business of potential customers or advisors?
Or something else altogether?
I am tempted to say this is the second post on this idea of moving from cash-starved to cash-rich, and it is. But that is not to say it is second in importance.

The first focused on Balance Sheet strategies. Back track if you missed it and then come on back.

Following are Income Statement areas of focus for a lender or business owner/manager wanting to improve liquidity. As is often the case, the hunt for improved cash flow dovetails nicely with the goal of improving profitability.

*Income Statement* Cash Improvement Opportunities:

  • Identify your most profitable revenue sources (profits now and potential).
  • Compare costs (out of pocket, energy, staff time) of your various revenue sources to decide if you are focused on the most profitable.
  • Consider growth opportunities.
  • While we are at it, if your company is a small business, consider what you really want to do more of. What resonates? What is fun? Really, life is too short to be stuck with what you do not want to do.
  • If it has been over six months since you took a hard look at your expenses, look again.
  • Consider assets you could sell and then lease back or rent as needed.
  • Consider contract labor rather than carrying employees, but remember that one reason to keep employees is access as things ramp up and retention of skills and company knowledge.
  • Postpone expenditures and purchases that will not be obvious to your customers. Be careful not to come across as a company in trouble, though.
  • If your employees will be negatively impacted by cost-cutting, communicate. How long will the cost-cutting be needed? Is it needed in order to avoid or reduce lay-offs? What needs to happen (revenue level or number of months cash flow) for the expenses to be possible?

Resources on Financial Statements

As I shared in the post on Balance Sheets, lenders and business owner/managers often need a brush-up on business financial statements to make the most of these ideas. Here is a short list of the relevant eCourses I have created just for lenders and they are just as valuable to business owner/managers:
  • Balance Sheet Basics (25:39 minutes)
  • Income Statement Basics (16:05 minutes)
  • Statement of Cash Flows Basics (22:39 minutes)
  • Terminology: A Foreign Language (25:53 minutes)
  • Types of Business Entities (22:58 minutes)
  • Cash versus Accrual Basis (16:20 minutes)
  • Debt, Debt Ratios and Debt Shortcuts (15:47 minutes)
  • Depreciation in Financial Statements and Tax Returns (17:10 minutes)
  • Introduction to Analysis (18:35 minutes)
  • Liquidity Ratios and Analysis (19:18 minutes)
  • Operating Cycle and Turnovers (23:11 minutes)
  • Leverage (20:57 minutes)
  • The Write-up (21:37 minutes)
Check them out at
An article on How to Turn Your Cash-Starved Company into a Cash Cow: 21 tips on How to Generate Cash within Six Months caught my attention and I decided it is time to share some basics, again. The author, Gary Patterson, MBA, CPA advises businesses and organizations on fiscal and risk issues and his ideas triggered a few of my own.

Why now?

As we finally come out of 'The Great Recession'
  1. Many businesses have already taken every step they can think of to improve their cash position...but last looked closely at these measures over a year ago. Time to look again.
  2. Others just recently got into a cash flow challenge because this recession and their business's recovery has taken longer than they planned. It is not too late in the game to institute cash saving measures.
  3. Still others are gearing up for growth which requires a careful monitoring of cash flow. Planning for growth needs to include planning for cash flow.

Bankers and Business Owner/Managers

If you are the banker, contact your prime customers or prospects and suggest you get together for a conversation that can help their business and their cash flow.

You don't have to make it sound like you think they are in trouble. Cash flow and cash management issues are as important to a healthy business as they are to a troubled business.

If you are the business owner, consider (or reconsider) whether you are making the most of your cash generation strategies.

Linda's *Balance Sheet* Cash Improvement Opportunities:

  • Communicate with your banker and company owners about availability of additional cash as needed.
  • Track cash needs carefully.
  • If cash is tight, create a 13 week cash flow projection at least monthly. If it is really tight, do it weekly.
  • Bill promptly.
  • Call when the customer is even one day late and follow up on the service or product. Make it a customer service call but of course, the late payment will come up as well.
  • Do not slow payables beyond the due date without a conversation with your vendors. You are in this together and they will remember. But if you are a valued customer with a temporary challenge, they may be happy to work with you.
  • Do not pay down debt early without carefully considering continuing cash needs or expenses/purchases you have deferred.
  • Discount slow moving inventory to get rid of it and improve cashflow.
  • Communicate with your vendors to be sure you can get what you need quickly when you need it.
  • Watch for stock-outs and days in inventory to fine-tune your purchasing.
That is my short list and I recommend you click through to Gary's article for his 21. Next post I'll focus on Income Statement CIOs (Cash Improvement Opportunities).

Resources on Financial Statements

Lenders and business owner/managers often need a brush-up on business financial statements to make the most of these ideas. Here is a short list of the relevant eCourses I have created just for lenders and they are just as valuable to business owner/managers:
  • Balance Sheet Basics (25:39 minutes)
  • Income Statement Basics (16:05 minutes)
  • Statement of Cash Flows Basics (22:39 minutes)
  • Terminology: A Foreign Language (25:53 minutes)
  • Types of Business Entities (22:58 minutes)
  • Cash versus Accrual Basis (16:20 minutes)
  • Debt, Debt Ratios and Debt Shortcuts (15:47 minutes)
  • Depreciation in Financial Statements and Tax Returns (17:10 minutes)
  • Introduction to Analysis (18:35 minutes)
  • Liquidity Ratios and Analysis (19:18 minutes)
  • Operating Cycle and Turnovers (23:11 minutes)
  • Leverage (20:57 minutes)
  • The Write-up (21:37 minutes)
Check them out at